Retro tax misgiving stays

Ficci members listen to the budget in New Delhi on Thursday. Picture by Ramakant Kushwaha

New Delhi, July 10: The budget failed to live up to the expectations of the foreign investors that the Narendra Modi-government would refrain from imposing taxes with retrospective effect.

Finance minister Arun Jaitley didn’t budge from his oft-stated position that the government would not be able to give such a blanket assurance.

“This government will not ordinarily bring about any change retrospectively, which creates a fresh liability,” Jaitley said even as he underscored that “the sovereign right of the government to undertake retrospective legislation is unquestionable”.

The issue had snowballed into a controversial issue after the UPA government tweaked a legislation in the budget for 2012 with effect from July 1962 to undermine a verdict handed down by the Supreme Court in the Vodafone tax case that absolved the telecom company from the obligation to pay a $2-billion withholding tax relating to the buyout of Hutchison Whampoa's 67 per cent stake in Hutchison Essar through an overseas transaction.

Vodafone had always insisted that it was under no obligation to pay the tax because the deal involved the transfer of shares in an overseas company that had no permanent establishment in India. The court upheld that view, prompting the UPA government to change the law with retrospective effect on the ground that the stake transfer was a sham deal designed to deny India a share of the proceeds as tax. It argued that the stake drew its value from the underlying Indian asset, which was all that the company held.

The retrospective tax had spooked foreign investors and prompted them to stay away from India because of the capricious manner in which the UPA government had tried to overturn the effects of the Supreme Court verdict.

The government’s action had sent the tax sleuths scurrying to find other companies that they could target using the same law. These included IBM, Cairn India and Royal Dutch Shell.

Jaitley said today said the government wouldn’t interfere with the legal process. “These cases are at different stages of pendency and will naturally reach their logical conclusion,” the finance minister said. However, the government said it would put in place a vetting mechanism for new cases under this law.

The Central Board for Direct Taxes will set up a committee, which will examine all fresh cases arising from the retrospective amendments of 2012 “in respect of indirect transfers and coming to the notice of the assessing officers”.

He said the government was committed to provide a stable and predictable taxation regime that would be investor friendly and promote growth. “I hope that the investor community both in India and abroad would repose confidence on our stated position and participate in the Indian growth story with renewed vigour.”

“There was widespread expectation regarding neutralisation of the retrospective amendment regarding indirect transfer. But that has not happened. The composition of the committee and the framework for decision making is unclear at this stage,” said Ketan Dalal of PwC India, who hoped that some middle path could be evolved to resolve the contentious issue.